Determinants of Uruguay's Real Effective Exchange Rate: A Mundell-Fleming Model Approach

Didarul Islam and Mohammad Abdullah Al Faisal

Papers from arXiv.org

Abstract: This study examines the factors influencing the short-term real effective exchange rate (REER) in Uruguay by applying an extended Mundell-Fleming model. Analyzing the impact of the US lending rate (USLR), money supply (M2), inflation (CPI), and the world interest rate (WIR), the paper uses a linear regression model with Newey-West standard errors. Key findings reveal that an increase in the USLR, CPI, and M2 is associated with a depreciation of the REER. In contrast, WIR shows no significant impact. These findings are consistent with the theoretical expectations of the Mundell-Fleming model regarding open economies under floating exchange rates. Therefore, authorities should tighten monetary policy, control inflation, adjust fiscal strategies, and boost exports in response to Peso depreciation.

Date: 2024-03
New Economics Papers: this item is included in nep-mon
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